Flashlight Capital offers to buy KT&G’s ginseng business for $1.4 billion

Singapore-based investment management firm Flashlight Capital Partners Pte. (FCP) has offered to buy South Korean tobacco maker KT&G Corp.'s ginseng business for 1.9 trillion won ($1.4 billion).

FCP, an activist investor and a minority shareholder in KT&G, said in a statement on Monday that it has sent the tobacco maker’s management board a letter of intent to acquire all shares of Korea Ginseng Corp.

The proposed price is a multiple of 10 Korea Ginseng 2023 earnings before interest, taxes, depreciation and amortization (EBITDA). The proposal also represents a 50% premium over the 1.2 trillion won to 1.3 trillion won valuation mentioned by KT&G Chief Executive Bang Kyung-man during the company’s 2023 investor day.

Industry officials said the proposal by FCP, which owns less than 1% of KT&G, is tantamount to a “hostile takeover bid” because the Singapore-based private equity firm didn’t discuss its buyout plan with KT&G in advance.

KT&G REJECTS FCP’S PROPOSAL

KT&G, which owns a 100% stake in Korea Ginseng, instantly rejected the offer, stating that it was a unilateral proposal from the fund.

"They disclosed its intention unilaterally without any prior discussions with us," KT&G said in a statement.

“Korea Ginseng’s health functional food business is one of the company’s three core businesses, along with next-generation products like heat-not-burn e-cigarettes and the overseas cigarette business,” it said.

Founded by The Carlyle Group’s former Seoul office chief Sanghyun Lee in 2020, FCP is an investment management firm focused on improving corporate governance and unlocking long-term value at its portfolio companies.

FCP believes that Korea Ginseng’s earnings significantly undervalue its business.

“We see immense potential in Korea Ginseng. We aim to develop the company into a global brand, comparable to Manuka honey or Maotai,” said FCP Managing Partner Lee in the statement.

Despite growing demand for health food, Korea Ginseng’s operating profit fell by half, from 202.1 billion won in 2019 to 103.1 billion won in 2023, and KT&G’s guidance indicates further decline in 2024, he said.

FCP argues that the tobacco-ginseng pairing is a “wrong marriage,” and that Korea Ginseng’s value is not reflected in KT&G’s stock price.

REPEATED DISPUTES WITH KT&G

Industry watchers said FCP is proposing the buyout, barely acceptable by KT&G, to bring up Korea Ginseng’s undervaluation and pressure KT&G’s board to accept its other requests.

Since 2022, FCP has advocated for a horizontal spin-off of Korea Ginseng from its parent and a separate listing on the Korean stock exchange.

Earlier this year, FCP opposed the appointment of Bang as KT&G CEO and sent a letter to the National Pension Service (NPS), a major shareholder of the tobacco company, urging it to stand with it.

The Industrial Bank of Korea is KT&G’s largest shareholder with a 7.3% stake, followed by the state-run NPS, which holds a 6.42% stake.

Korea Ginseng is best known for its flagship ginseng brand Jung Kwan Jang.

The ginseng maker posted 1.37 trillion won in sales revenue last year.

Following FCP's revelation of its intent to buy Korea Ginseng, shares of KT&G, listed on Korea's main bourse, closed up 5% at 107,300 won on Monday, outperforming the benchmark Kospi index’s 1% rise.

Analysts said KT&G has become a major target of activist funds due to the weak structure of its outside director group, which lacks industry expertise.

In October 2023, FCP filed a court injunction against the tobacco maker, seeking the disclosure of information related to the firm’s export business profitability and dubious global distribution contracts with Philip Morris International.

Write to Jong-Kwan Park at pjk@hankyung.com
In-Soo Nam edited this article.